Construction spending in U.S. rises on gain in home building

Construction spending in the U.S. rose in February, paced by the highest level of home building in more than four years.

Outlays climbed 1.2% to an $885.1 billion annual rate, following a 2.1% decrease in January, the Commerce Department reported today in Washington. The median forecast of 41 economists surveyed by Bloomberg called for a 1% rise.

Near record-low borrowing costs and an improved outlook for jobs are lifting demand for residential real estate, giving a boost to homebuilders including KB Home. Faster hiring would ensure a more sustained rebound in the industry, allowing for bigger gains in construction spending.

“Housing, growth-wise, will be the best-growing sector of the major sectors in 2013, hands down.” Ken Mayland, president of ClearView Economics LLC in Pepper Pike, Ohio, said before the report. “I’m totally optimistic about housing’s recovery-- there’s an inevitability that it has to go higher.”

Estimates in the Bloomberg survey ranged from no change to a 2% gain. January’s reading was unrevised from the initial estimate.

Construction spending increased 6.6% in the 12 months ended in February before adjusting for seasonal variations.

Private construction spending advanced 1.3% from the prior month.

Housing Rebound

In housing, outlays climbed 2.2% to a $303.4 billion annualized pace, the strongest since November 2008. The gain was led by single-family projects, which increased 4.3%, and a 0.5% increase in home-improvement spending. Private non-residential projects rose 0.4%, led by construction of power plants and health-care facilities.

Spending on public construction climbed 0.9% from the prior month, the biggest advance since August. State and local agencies led the advance, while federal outlays dropped 1.1%, a second consecutive decrease.

Recent reports indicate a pickup in demand for housing. Sales of new homes in February capped the best two back-to-back months in more than four years, the Commerce Department reported last week. Builders began work on more houses in February and permits for future construction climbed to an annual pace of 917,000, the highest level in almost five years, pointing to a sustained rebound that will help power the U.S. expansion.

Advances in residential construction probably will give an even bigger boost to growth this year than in 2012, when it contributed for the first time in seven years. The gains are rippling through the economy as improving property values help restore consumer confidence and benefit builders such as Ryland Group Inc. and Lennar Corp.

Buying Land

KB Home is among companies buying land in anticipation of increased demand. The Los Angeles-based builder nearly doubled its spending, to almost $350 million, on land acquisition and development in the first quarter, and has been raising prices, Chief Executive Officer Jeffrey Mezger said.

“There is no question we expect continuous strong growth,” Mezger said on a March 21 earnings call. “We have a lot of upside in every market that we’re in, and they’re now all recovering and there’s opportunities in every city.”

In addition to housing, the shale gas boom in Pennsylvania and other parts of the U.S. is giving a boost to industrial engineering and construction companies including Fluor Corp. The Irving, Texas, company also reports increased activity in the Gulf Coast as companies including Dow Chemical Co. and South Africa’s Sasol Ltd. begin work on new petrochemical plants.

The energy industry will need to “ramp up our construction resource capability,” Vice President Kenneth Lockwood said at a March 21 conference. “It’s an exciting opportunity.”